Stagflation Warning Signs
When you look at what happened in the first half of the 1970s, the similarity between then and now is frightening.
Our economy has stalled, last quarter’s GDP was revised down to 1.25% and many economists expect the U.S. to head into a recession next year. Unemployment has been stuck above 8% for more than three years and has only been kept down by a decline in the labor force.
The Fed likes to argue that inflation has remained low, but it seems that trend is starting to change.
Just look at data from the American Institute for Economic Research (AIER), which “backs out” the big-ticket items that are infrequently purchased by consumers. It concentrates instead on “everyday prices” – the regularly purchased items that matter most to working Americans.
Its Everyday Price Index (EPI) rose 1.8% in August compared to the U.S. Bureau of Labor Statistics Consumer Price Index (CPI) which only rose 0.6% in August. Year-to-date the EPI has increased 4.2%, three times the 1.4% increase in the seasonally-adjusted CPI.
And although the oil embargo currently enacted by Iran is not as catastrophic as OPEC’s 1973 embargo, there are still numerous catalysts that could send oil soaring. Escalating tensions in Iran, overestimated supplies, and increased worldwide demand for oil could send the price above $150 a barrel next year.
What You Should Do Now
In order to avoid stagflation and another lost decade, the Fed needs to stop increasing the monetary supply and examine how previous Fed Chairman Paul Volcker raised interest rates from 1979-83 in order to end stagflation.
It was clear already back in August that consumer confidence was weakening. There is now more data that reinforces this conclusion. A few days ago the Bureau of Economic Analysis published its latest data on personal income, and it is not good news for the Obama re-election campaign. First, the BEA’s summary:
Private wage and salary disbursements increased $4.7 billion in August, compared with an increase of $9.3 billion in July. Goods-producing industries’ payrolls decreased $6.4 billion, in contrast to an increase of $3.2 billion; manufacturing payrolls decreased $5.2 billion, in contrast to an increase of $3.4 billion. Services-producing industries’ payrolls increased $11.2 billion, compared with an increase of $6.0 billion. Government wage and salary disbursements increased $0.7 billion, in contrast to a decrease of $0.7 billion.
Shifts from one month to the next are not very important for long-term trends, but they do help us track swing points in the economy. The weakening trend in private wage and salary disbursements gives a tangible framework to the weaker consumer confidence we saw in the GDP data in August. People are not just less confident because of some general perception of where the economy is heading: they are feeling the squeeze in their own private finances. This kind of confidence weakening is more solid and harder to break, so to speak, than if the weakening was caused by less tangible, macroeconomic variables.
The BLS reported 12.1 million still unemployed in September, another 8.6 million employed part-time for economic reasons, and another 2.5 million marginally attached to the labor force. The latter “were not counted as unemployed because they had not searched for work in the 4 weeks preceding the [September] survey,” even though they “wanted and were available for work,” according to the BLS.
All of these are counted in the U6 unemployment rate as also reported by the BLS. Because the primary change during the month was that 582,000 on net shifted from unemployed to employed part time for economic reasons, this U6 unemployment rate remained unchanged last month at 14.7%. The total suffering this U6 unemployment was 23.2 million.
Moreover, even this doesn’t nearly fully account for the 8.2 million Americans who have given up hope during the Obama term of office, and dropped out of the work force altogether. When you are considered out of the work force, you are no longer counted as unemployed, even though you still do not have a job, and you still want and are available for work.
Manhattan’s average weekly wage fell 6.3 percent in the first quarter from a year earlier, the most for any big U.S. county, as bonuses in the financial industry declined, according to the Bureau of Labor Statistics.
The drop in Manhattan, the only one of the five boroughs that make up New York City with a decline, was mostly attributable to $5.3 billion, or 13.4 percent, of lost wages in financial activities. Average weekly wages in that industry dropped 13.7 percent, as no other job category with more than 1,000 employees fell more than 1 percent, the U.S. Labor Department said today in a statement.
“The report confirms that earnings on Wall Street are down,” Martin Kohli, chief regional economist for the bureau, said in an interview. “The good news is employment is growing in other boroughs of the city, although none of the city’s boroughs are showing strong wage growth.”